United Petroleum Pty Ltd v Coastal Service Centres Pty Ltd

1. [1]

   WHITE JA: I agree with Basten AJA.

2. [2]

   HARRISON JA: I agree with Basten AJA.

3. [3]

   BASTEN AJA: The respondent, Coastal Service Centres Pty Ltd (Coastal), is the owner of land near the Pacific Highway at North Arm Cove, north of Newcastle. Pursuant to a lease which commenced on 1 July 2016 (Lease), part of the property was leased to the appellant, United Petroleum Pty Ltd (United). The site was known as “The Rock Roadhouse” because the building was in the form of a replica of Uluru.

4. [4]

   On 31 July 2018, a fire destroyed the building. The fuel pumps and tanks were not damaged and United has continued, after a brief suspension of services, to operate as a service station with demountable buildings.

5. [5]

   On 18 January 2022, Coastal served on United a notice pursuant to annexure B, cl 8.2.3 of the Lease that Coastal considered that “the damage is such as to make its repair impracticable or undesirable” (cl 8.2.3 notice). The effect of the notice was to permit Coastal to terminate the Lease on 14 days’ notice. The notice itself did not purport to terminate the lease.

6. [6]

   Pursuant to proceedings in the Equity Division, heard between 24 and 27 July 2023, United challenged the validity of the notice and thus the entitlement of Coastal to rely upon the notice to terminate the lease. By orders made on 23 August 2023, the trial judge, Peden J, dismissed United’s claim. [1] On 9 November 2023, United filed a notice of appeal.

Issues on appeal

1. [7]

   The issues as to the validity of the notice of consideration arose on the pleadings by way of a second cross-claim and a further amended statement of cross-claim filed by United on 11 July 2023. The question of validity arose in that way because the initial proceeding was commenced by Coastal seeking a declaration that United was in breach of the Lease, primarily on account of unpaid rent and unpaid outgoings. The pleading of the temporal issue was succinct: namely that the termination of the Lease was invalid because “the notice was given approximately 3½ years after the fire, which was not within a reasonable time of the damage occurring”. [2] This allegation was met with a simple denial in the amended defence to the cross-claim. [3]

2. [8]

   A number of grounds of invalidity raised in the pleading and pursued before the trial judge were not the subject of the appeal. The first was that, having earlier formed a view that it intended to repair the premises, and communicated that intention to United, Coastal was not thereafter entitled to issue a cl 8.2.3 notice, either because it had elected not to issue the notice or had waived its right to issue the notice. Secondly, similar circumstances were said to estop Coastal reversing its position on rebuilding and issuing the notice. Each of these challenges was rejected by the trial judge and not reagitated on appeal.

3. [9]

   Although the notice of appeal contained 13 separate grounds, the issues fell conveniently into three categories.

4. [10]

   The first issue involved an assertion that a cl 8.2.3 notice could only be given within a reasonable time of the event causing damage to the property. Coastal conceded that the notice had to be given within a reasonable time, but there was a dispute as to when the relevant period commenced. United submitted that the relevant period ran from the date of the damage to the date when the landlord decided that cl 8.2.3 was engaged. Coastal submitted that the relevant period ran from the time the landlord formed that opinion until notice was given. Although Coastal denied that there was any temporal limitation arising before its managing director formed the necessary opinion, it also submitted that there had been no unreasonable delay leading up to that decision.

5. [11]

   For the reasons explained below, both stages involved an implied constraint to act within a reasonable time; however United did not establish that Coastal had failed to act with sufficient diligence at either stage.

6. [12]

   The second set of issues turned on a separate constraint on the power conferred by cl 8.2.3, namely that it had to be exercised reasonably and in good faith. The trial judge accepted that there was a good faith limitation on the exercise of the power, but did not accept United’s submission that the valid exercise of the power required that it be objectively reasonable. The proper formulation of the legal criterion was an important aspect of the appeal. However, as will be explained, neither the terms of the contract, nor judicially devised principles of construction, permit a simple answer to the question so formulated. Nevertheless, the proper conclusion is that the trial judge did not err in her approach to this issue.

7. [13]

   Having identified the relevant test, the third category of grounds involved specific challenges to aspects of Coastal’s decision-making which were said to fall foul of the implied constraint. United did not call oral evidence but relied upon documentary evidence and cross-examination to establish that Coastal’s managing director, Mr Roberts, had not acted reasonably in forming an opinion that to repair would have been impracticable or undesirable and, indeed, that he did not genuinely hold such an opinion at the time notice was given.

8. [14]

   The challenge to the genuineness of Mr Roberts’ beliefs required United to confront the favourable credit findings made by the trial judge. United essayed that task by relying in part on concessions made by Mr Roberts in his cross-examination and in part on documentary evidence said to be inconsistent with aspects of Mr Roberts’ evidence.

9. [15]

   Ultimately, it will be seen that United’s challenges to the findings of the trial judge must be rejected. It follows that the appeal must be dismissed.

Factual background

1. [16]

   The temporal challenge requires attention to the circumstances from the date of the fire until the issue of the cl 8.2.3 notice. The second group of issues, relating to the circumstances in which the notice was issued, largely depended on steps taken by Mr Roberts between November 2021 and January 2022.

2. [17]

   On 31 May 2018 Coastal entered into a contract to buy the property. The fire occurred precisely two months later on 30 July 2018 and prior to settlement of the purchase. After further negotiations as to price, settlement ultimately took place on 20 June 2019, with a Deed of Variation adjusting the purchase price from $6.5 million to $5 million (plus GST). At the time of settlement, Coastal took steps to obtain development consent to rebuild the roadhouse. On 18 June 2019 Coastal engaged town planners (Perception Planning) and on 19 July 2019 they lodged a development application with the consent authority, Mid Coast Council. In early October 2019, the remains of the roadhouse were demolished.

3. [18]

   In the meantime, on 7 November 2018, the previous owner, Whitehorn Estates Pty Ltd, entered into the Lease with United, which was back-dated to commence on 1 July 2016. The Lease was therefore executed at a time when United was not operating, because of the fire-damage. Although the fuel storage tanks were under the destroyed roadhouse, they were not damaged. The bowsers were also undamaged. On 24 August 2018, a development application for “temporary structures for fuel/convenience sales and toilets for service station” was approved. United recommenced operations, for reduced hours, on about 21 December 2018. Its service facilities were located in the demountable buildings which were approached across an uneven gravel area. United took advantage of a rent abatement clause in the Lease to make payments at 44% of the agreed figure in the Lease. Upon becoming the registered owner of the property, and landlord by assignment under the Lease, Coastal immediately commenced invoicing United for 75% of the rent payable under the Lease.

4. [19]

   Mr Roberts gave evidence of a conversation “around the second half of 2019” with a banker from the National Australia Bank (NAB), which had financed the purchase of the property, in relation to a loan to cover the cost of rebuilding. [4] On the basis of that conversation, Mr Roberts formed the view that he would not be able to obtain finance whilst United was paying only 44% of the rent provided for in the Lease.

5. [20]

   On 27 November 2019, Coastal commenced proceedings against United seeking to recover unpaid rent. Although commenced in the Local Court, the proceedings were transferred to the Equity Division. As amended on 11 September 2020, the statement of claim sought a declaration that United was in breach of the “usual opening hours requirement” and an order for payment of unpaid rent and unpaid outgoings.

6. [21]

   Annexure A, cl 16.3 of the Lease provided:

7. [22]

   Steps were taken in December 2019 to engage in consultation at the time that the development application was lodged with the Council. The only relevance of that step for present purposes is that it confirmed that Coastal was then communicating to United its intention to proceed with the rebuilding of the roadhouse.

8. [23]

   Prior to the fire, the roadhouse included (i) the sales facilities and a convenience store operated by United, (ii) a food outlet operated by Subway, (iii) a take-away food outlet operated by Ms Tania Mangion and (iv) a further food preparation and dining area operated by Great Aussie Bush Camp. None of the operators other than United has resumed business at the property.

9. [24]

   In accordance with the terms of the development application, Mr Roberts proposed to undertake the rebuilding of the roadhouse by another company in the Coastal Group, also under his control, namely Coastal Earthmoving Hire Pty Ltd (Coastal Earthmoving). The initial letter from the project coordinator of Coastal Earthmoving, seeking a planning meeting with Perception Planning, commenced:

10. [25]

    Council approval was obtained on 24 December 2019 and Perception Planning was given written notification of the consent on 10 January 2020. In mid-April 2020, Coastal informed United that it intended to commence construction “on or about 1st May 2020”. At that stage, it did not have a construction certificate, but Mr Roberts said he had no doubt that Coastal would be able to obtain one and that there was cleaning up and demolition work to be undertaken as a preliminary step. He was also of the view that finance would not be a problem. [5]

11. [26]

    The development application included an estimated cost of development of $1.5 million. Although it is not uncommon for costs to be estimated conservatively where fees may depend upon the estimate, Mr Roberts, confirmed that he had made that estimate in mid-2019. [6] It accorded with the reduction in price on the purchase of the property. Mr Roberts also gave evidence that in mid-2020 he had sought a quotation from Drayton Group Pty Ltd (Drayton) to check that his initial estimate was “still realistic”. [7] On 7 July 2020 Drayton quoted, to rebuild the roadhouse in accordance with the plans supplied by Perception Planning, an amount of $3,280,000 plus GST, that is more than twice Mr Roberts’ initial estimate of 12 months earlier.

12. [27]

    On 29 October 2020, United filed a cross-claim seeking a declaration that the rent payable under the lease, adjusted pursuant to cl 8.2.2, was the amount which it had been paying.

13. [28]

    In accordance with its commencement date and the specified period of five years, the Lease was due to expire on 30 June 2021. However, United had a right of renewal, which it sought to exercise by serving a notice on Coastal on 25 March 2021. In response, on 31 March 2021, Coastal issued a notice of breach of covenant relying on breach of the usual opening hours requirement, together with a notice under the Conveyancing Act 1919 (NSW), s 133E, noting that the right of renewal was only available if there were no outstanding payments due for rent or outgoings and that, at the time of service of the notice of renewal, United was in default in an amount of some $293,000.

14. [29]

    On 14 December 2021 United’s lawyers sent Coastal’s lawyers an offer of compromise, on the basis of which the proceedings brought by Coastal were settled.

15. [30]

    The agreement to accept United’s offer of compromise of Coastal’s claim was communicated on 17 January 2022. The agreement provided for United to pay an abated rent calculated at approximately 79% of the rent payable under the Lease. That agreement was formalised in consent orders made by Darke J in the Equity Division on 27 January 2022.

16. [31]

    The precise timing of various steps taken between 14 December 2021 and 18 January 2022 was a significant issue at the trial and those events will be discussed below.

Notice of Consideration – cl 8.2.3

1. [32]

   On 18 January 2022 Coastal served on United its cl 8.2.3 notice advising that “Coastal considers that the damage is such as to make its repair impracticable or undesirable”. The notice also contained an express statement that “this is not a termination notice”, stating that “each of Coastal and United have the power under cl 8.2.3 to terminate the lease by giving not less than 14 days’ notice in writing of termination”.

2. [33]

   The critical provision in the Lease was cl 8.2, which appeared under the heading “What happens if the property is damaged?”. Subclauses 8.2.1 and 8.2.2 provided for a suspension of the tenant’s obligation to pay rent if the property could not be used or was inaccessible due to the damage, and subcl 8.2.2 provided for an abatement of the liability to pay rent if useability was diminished due to the damage. Otherwise, cl 8.2 relevantly provided:

3. [34]

   In his principal affidavit of 19 January 2022, Mr Roberts gave evidence of having formed the belief that it was both “impracticable” and “undesirable” to proceed with the rebuilding of the roadhouse. He gave evidence of the circumstances which led him to that conclusion and the timing of his consideration of those circumstances. That evidence was the subject of challenge by way of cross-examination and the detail of those circumstances and Mr Roberts’ evidence will be addressed below in considering the relevant grounds of appeal. However, the reasoning may be summarised in the following terms.

   1. (1)

      First, Mr Roberts made a fresh calculation of the likely cost of rebuilding the roadhouse based in part on Drayton’s quote, together with the expected cost of additional items which were not covered by the quote and by making allowance for an increase over Drayton’s June 2020 figure to take account of the surge in costs over the period of COVID and subsequent experience.

   2. (2)

      Secondly, he took into account the likely increase in rental income which included an increase of 21% in the rental payable by United (which would no longer be subject to abatement) together with the income obtainable from three additional tenants.

   3. (3)

      Thirdly, he calculated a rate of return as a percentage of the rebuilding costs, concluding that the rate of return would not satisfy a bank from whom a loan would be required to cover the costs. Furthermore, Mr Roberts reasoned, even if a bank would accept a lower estimated rate of return, he was not prepared to risk incurring a major liability for the anticipated lower rate of return.

4. [35]

   Apart from the third step in the analysis, challenges were made to the amounts relied upon at each of the two prior steps. Those challenges will be addressed below.

Temporal limitation (grounds 1-4)

1. [36]

   The parties each accepted that the power conferred on Coastal by cl 8.2.3 should be exercised “within a reasonable time”. The point of difference was said to be that, on Coastal’s contention, the period ran from the time at which Mr Roberts (as the personification of the company) formed the view that permitted the giving of a notification. Coastal disputed the alternative approach relied on by United, namely that a view had to be formed and notification given within a reasonable time after the occurrence of the damage. Clearly, however, there were two potential triggers and the reasons for accepting one applied equally to the other.

2. [37]

   There is a sense in which this was a false issue. As Coastal submitted in writing, “[u]ntil the circumstances are such that the landlord can, as a matter of fact, consider whether the repair is impracticable or undesirable, the reasonable period in which to issue the notice will not have commenced”. [8] It is clear that if that point of time has not arisen, there can be no finding of unreasonable delay. However, in principle United’s position should be accepted. The whole of cl 8 is concerned with the rights of the parties in circumstances where justice requires some adjustment of the obligations imposed by the lease. Coastal submitted that if there were some concern about injustice to the lessee in not imposing a time constraint on the giving of notification by the landlord of an intention not to repair, the answer is found in cl 8.2.4 which permits the lessee to require the landlord to repair and expressly provides that failure to repair within a reasonable time permits the tenant to terminate the lease. However, that clause only protects a tenant who does not wish to stay unless the premises are rebuilt. Further, it is arguable that the right of the tenant to take such a step is also required to be exercised within a reasonable time after the damage occurs.

3. [38]

   United complains that the trial judge adopted Coastal’s contention without considering the contrary arguments. That proposition need not be accepted, but it is true that the key passage in the reasoning is obscure:

4. [39]

   The difficulty arises in part from the fact that this statement occurs in the course of addressing United’s submission that “Coastal is not entitled to issue a [cl 8.2.3 notice] in circumstances where it had made a decision to repair and rebuild the Rock”. [9] This was the “election” submission which was rejected and not pursued in this Court. [10] Given that the constraint is to be imposed by way of an implied term in the contract, a plausible form of cl 8.2.3 would commence as follows:

5. [40]

   So understood, the subject-matter of the notification is the landlord’s opinion as to the practicability and the desirability of repairing the damage which, the provision assumes, is unrepaired. The ordinary reading of such a provision would be that notification must be given within a reasonable time of the damage, meaning that the landlord must give consideration to repairs and, if it forms the view that repairs are impracticable or undesirable, give notice to the tenant, all those steps being required within a reasonable time.

6. [41]

   To the extent that the trial judge did not consider the issue in those terms, grounds 1 and 3 should be upheld. (It is not necessary to address the detailed particulars in ground 2.) The question then raised by ground 4 is whether the trial judge ought to have found that the cl 8.2.3 notice was not given within a reasonable time. Both parties addressed that issue.

7. [42]

   Coastal’s position, as expressed in its written submissions, was that “it was not until the abated rent was known that Coastal was able to determine the additional revenue it would earn if it rebuilt the Rock”. Once it knew its legal entitlement in that respect, Coastal submitted that Mr Roberts acted promptly to assess the situation and give notice to United. The latter submission was not seriously challenged and should be accepted.

8. [43]

   United’s response was that Coastal “was able to, and did in fact, consider the practicability and desirability of rebuilding even whilst the rate abatement dispute was ongoing”. [11] Further, according to United, Coastal took a number of steps in pursuit of a proposed rebuilding exercise during that period. United concluded:

9. [44]

   The last proposition should not be accepted. Uncertainty is surely not a basis to force a landlord to take a step which may result in the termination of the lease, for fear of losing the opportunity to do so if the uncertainty is resolved in one way rather than another. It is difficult to see that such a position advances the interests of the tenant.

10. [45]

    On the other hand, to rely on a course of conduct from which it may be inferred that the landlord was giving serious consideration to rebuilding the premises is perhaps to focus upon the ambiguous term “considers” in cl 8.2.3. To consider something to be true is to hold a belief; to consider whether something is true is to go through a process preceding the belief. Clause 8.2.3 refers to the notification of the tenant that “the landlord considers that … repair [is] impracticable or undesirable”. It thus refers to an actual belief and not to a consideration of circumstances which may or may not lead to that belief. The activities on which United relies as having been undertaken from June 2019 to November 2021 were steps which it was reasonable to undertake in order to make a firm decision as to whether rebuilding should proceed.

11. [46]

    Finally, the uncertainty as to the rent payable by “one tenant”, namely United, which was the only tenant at that point, was not insignificant. The annual rent payable by United under the Lease in the financial year 2019-2020 was $535,000. Whilst United was paying 44% as the abated rate, the shortfall was $300,000. Calculated at 79% the shortfall (21%) was $112,350. The difference was $270,650. Given that other tenants were expected to pay a figure in the order of $180,000 (including GST) some 75% of the anticipated revenue would be paid by United. More importantly for Mr Roberts’ calculations, the benefit from rebuilding, so far as United’s Lease was concerned, would be the difference between the full rent and the 79% being paid under the agreed settlement. That figure for that particular year (21% of $535,000) was $112,350. The benefit to Coastal of spending a significant sum in rebuilding the premises was to obtain revenue, inclusive of GST, in a greater amount of $300,000. This was, once GST was allowed for, the calculation undertaken by Mr Roberts at par 78 of his affidavit. Thus, although the higher abated rate agreed in the settlement may have provided Coastal with more immediate cash, it reduced the desirability from Coastal’s point of view of undertaking the rebuilding exercise. Thus, whether or not the precise calculations are correct or reasonable, it was not unreasonable to await the resolution of the rental abatement dispute. That dispute may be said to have been resolved by acceptance of United’s offer of 14 December 2021. The offer was open for 28 days. There appears to have been correspondence between the solicitors on 10 and 13 January 2022, which resulted in the formulation of consent orders but was not available to this Court. [12] A delay of one month (over the Christmas/New Year period) before the offer was formally accepted and the cl 8.2.3 notice was given, could not be said to be an unreasonable delay.

12. [47]

    Mr Roberts gave evidence of the steps he took over that period, which was the subject of cross-examination going to his credit, but the details are not relevant to this point.

13. [48]

    It therefore follows that, whilst it is appropriate to take account of the period from the date of the damage until the date the cl 8.2.3 notice is given, United failed to establish that, in the circumstances of the case, the notice had not been given within a reasonable time.

Validity of cl 8.2.3 notice – legal principles (grounds 5 and 6)

1. [49]

   Grounds 5 and 6 in the notice of appeal took issue with a finding by the trial judge that the obligation of the landlord when exercising the power in cl 8.2.3 was to form a genuine opinion, acting in good faith. The terminology adopted in ground 6 reflected the approach United said should have been adopted:

2. [50]

   Ground 5 took issue with two passages in the judgment below, which were said to reflect acceptance of the parties which United denied ever having accepted. Rather, United said it had insisted at trial that there was a separate part of the test which required objective reasonableness. However, on an appeal by way of rehearing, there is no utility in analysing the submissions of the parties as opposed to determining the substantive issue, namely whether Mr Roberts’ conduct was to be assessed according to an objective reasonableness criterion.

3. [51]

   The impugned passage in the reasons of the trial judge read as follows:

4. [52]

   If it were necessary to determine how precisely United ran its case at trial, there must be doubt as to whether an objective standard of reasonableness was adopted and, to the extent that there were references in the pleading and in the written submissions to “reasonableness”, as to how that term was to be understood.

5. [53]

   First, so far as the pleading was concerned, the further amended statement of cross-claim contained the following allegation:

6. [54]

   That pleading was no doubt succinct but could not be taken at face value. Paragraph 7(a) suggests an implied obligation to rebuild, a proposition properly disclaimed by the appellant. Paragraphs 7(b) and (c) may be intended to distinguish an obligation to act reasonably from acting in good faith, although, as will be seen, it is not clear that the case law relied upon in submissions makes that distinction. Importantly, in the opening outline of submissions provided to the trial judge, the present issue was addressed under the heading “Any exercise of cl 8.2.3 must be done in good faith”. [13] The statement of principles commenced by reference to “the imposition of good faith in commercial contracts” and continued over several paragraphs in identifying the content of the obligation of “good faith”. That obligation was said to include a requirement to “act reasonably and with fair dealing having regard to the interests of the parties …”. The only submissions which took the matter any further are those which relied upon a passage in the judgment of Bryson J in McIntosh v Dylcote Pty Ltd [14] to which reference will be made below.

7. [55]

   For the reasons which follow, the trial judge was in any event correct in the principles she adopted in assessing the validity of the notification under cl 8.2.3.

Nature of power invoked

1. [56]

   Although the appellant sought to justify a review of the exercise of power under the Lease by reference to statements made in judgments, the starting point for the inquiry must be the language of cl 8.2.3 itself, read in its contractual context. That focus reveals two critical factors. First, the criterion of the engagement of the power to give a notice turns on what “the landlord considers”. That is, the objective fact is an opinion, belief or state of satisfaction of the landlord as to particular matters: it is not the objective existence of the specified criteria. That distinction is commonplace in construing instruments conferring powers. In relation to a statute, Gibbs J stated in Buck v Bavone: [15]

2. [57]

   That approach has a long history in public law and permits a resolution of the tension between ensuring that public authorities operate strictly within the scope of their statutory functions, while acknowledging that the decision-making authority, which may require the exercise of evaluative judgment, is vested in the authority and not the Court. In The King v Connell; Ex parte Hetton Bellbird Collieries Ltd [16] Latham CJ stated:

3. [58]

   These principles are not restricted to public law: very similar principles apply with respect to the exercise of functions by trustees. A canonical statement of the constraints on review of the exercise of powers conferred on a trustee may be found in the judgment of McGarvie J in Karger v Paul: [17]

4. [59]

   McGarvie J further noted that it was relevant to look at “evidence of the inquiries which were made by the trustees, the information they had and the reasons for, and manner of, their exercising their discretion”. He continued:

5. [60]

   The private trustee is not acting in his or her own interests, but on behalf of others. That is so even if the trustee is a corporation which is remunerated for its services. [18] (A more interventionist approach will be justified in the case of a superannuation trustee which is required to make a payment to a beneficiary where specified criteria are satisfied. [19] )

6. [61]

   The second aspect of cl 8.2.3 which is significant is the statement of criteria for the consideration of the landlord. The two criteria, disjunctively expressed, are impracticability and undesirability. The criterion of impracticability implies an assessment of factual considerations, such as the nature of the damage, the likely cost of repair and other related physical or financial circumstances. By contrast, the concept of desirability allows both a wider range of factors to be taken into account and permits a broad discretionary element as to the intentions of the landlord, including its assessment of available resources. Indeed, the latter consideration comes close to freeing the landlord from reviewable decision-making. As Gibbs J noted in Buck v Bavone, in relation to a statutory power, “where the matter of which the authority is required to be satisfied is a matter of opinion or policy or taste it may be very difficult to show that it has erred in one of [the ways discussed], or that its decision could not reasonably have been reached. In such cases, the authority will be left with a very wide discretion which cannot be effectively reviewed by the courts”. [20]

7. [62]

   It is clear that in the contrasting case, a decision which “could not reasonably have been reached” is one which, as described above, was “so unreasonable that no reasonable authority could properly have arrived at it”. That appears from the following passage in the reasoning of Gibbs J: [21]

8. [63]

   The point of the discussion was that if a person could demonstrate that he or she was growing potatoes, there being no other criterion for registration, or for refusing registration, the registration board, acting in good faith, could not fail to register such a person.

9. [64]

   There is no doubt that the exercises of judicial control over public authorities and over trustees each involve different issues from the control of a discretionary power conferred on one party to a commercial contract which may effect termination of the contract. Nevertheless, the common elements of control of administrative decision-making and trustees demonstrate that the former are not divorced from private law. Further, it would be curious, if not incoherent, for the law to impose on the consensual agreements of commercial parties, absent proof of unequal bargaining power or unconscionability, a higher level of control than that which applies to public authorities. At the very least, care should be taken not to read statements in contract cases too broadly in their apparent effects so as to give rise to potential incoherence.

10. [65]

    Turning to the authorities relied upon by the appellant, two points should be borne in mind. The first is that a range of epithets is used to describe possible bases of intervention, without a consistent attempt to define their scope. That may appear bewildering, but the foregoing discussion indicates that most if not all of the terminology has been applied in other analogous situations. The second, and related, point is that where words have been used in analogous contexts, without further definition, they should be understood to refer to established concepts.

11. [66]

    Although the application of principles of good faith to the performance of contracts is treated as commencing with a judgment in 1992, Renard Constructions (ME) Pty Ltd v Minister for Public Works, [22] there is a separate line of authority dealing with the scope of express obligations to negotiate in good faith. Because there was no dispute, and the trial judge accepted, that Mr Roberts was required to give genuine consideration to matters relevant to the exercise of the cl 8.2.3 power, and not to exercise it arbitrarily or capriciously or, which may be much the same thing, for a purpose foreign to the purpose for which it was agreed upon in the contract, what the cases have to say generally about good faith is of limited significance. The material question is whether the cases prescribed that a criterion of objective reasonableness be read into the exercise of cl 8.2.3.

12. [67]

    The contract in Renard Constructions established a scheme by which the principal was required to give the contractor a notice in writing to show cause why, in a case of default by the contractor, a power to take work away from the contractor should not be exercised. The default was to be specified in the show cause notice, and if the principal did not accept the contractor’s response, the contractor was entitled to refer the matter to arbitration on the basis of “objective considerations including questions of reasonableness in showing cause against the exercise of the powers”. [23]

13. [68]

    Priestley JA noted that questions had arisen as to whether there was an obligation imposed on the principal to act objectively reasonably either in exercising the power or in dealing with a response to a show cause notice. Priestley JA held: [24]

14. [69]

    Priestley JA implied such a term, considering it was justified both by reference to the implied actual intention of the parties and as a matter of law. (It is not necessary to explore why a court should look for “actual intention” in circumstances where the meaning and operation of a contract is determined objectively by reference to its text.) He reasoned, by reference to cl 44: [25]

15. [70]

    As will be seen shortly, this reasoning was accepted in the second case involving an unqualified power exercisable upon breach or default. However, there is a question as to why the problem of trivial or insignificant defaults or breaches might not be resolved by reading the contract, including the consequences of the exercise of the power, as only applicable to breaches or defaults which were not trivial and were such as could warrant termination. This point was made by Gummow J in the Federal Court in Service Station Association Ltd v Berg Bennett & Associates Pty Ltd: [26]

16. [71]

    Gordon J adopted a similar approach in Realestate.com.au Pty Ltd v Hardingham. [27] However, as the present case does not involve breach or default on the part of either party, nor a case where there is a show cause provision and the opportunity for arbitration, this question need not be pursued.

17. [72]

    Two other observations should be made, regarding the reasoning in Renard Constructions. First, Priestley JA ended his reasoning by reference to two topics, the first of which was “Good Faith”. [28] He stated:

18. [73]

    Secondly, Meagher JA adopted a somewhat different approach, as did Handley JA. However, relevant passages in their reasoning may be addressed having regard to an important element in the appellant’s case which derived from Renard Constructions.

19. [74]

    Thus, a fundamental element in the appellant’s case, as identified in the grounds of appeal, was that Mr Roberts’ decision to issue the cl 8.2.3 notice was “not rational and informed but grounded upon misleading, incomplete and prejudicial information in important respects”. [29] To similar effect, the appellant’s written submissions stated that the obligation of good faith was defined as requiring a party to “not act upon a fundamental misunderstanding of relevant matters, or upon misleading, incomplete and prejudicial information”. [30] That terminology was sourced to Renard Constructions at 276, 279.

20. [75]

    The passage at 276, in the judgment of Meagher JA, read as follows:

21. [76]

    The clause permitting the principal to take over the contract and exclude the contractor turned on the state of satisfaction of the principal as to certain matters. Meagher JA held that “[i]nherent in the notion of being ‘satisfied’ is an ability to comprehend the factual background on which satisfaction is required”. He then observed that, on the arbitrator’s findings, “the principal’s mind … was so distorted by prejudice and misinformation that he was unable to comprehend the facts in respect to which he had to pass judgment”.

22. [77]

    To take the phrase “grounded on misleading, incomplete and prejudicial information” out of context is to give it a flavour as a finding of fact which is misleading; to ascribe to it status as a legal standard is to ignore both the context in which Meagher JA accepted it, and that it was merely a description of certain facts used by the arbitrator whose function it was to review the decision of the principal on the merits once a dispute had arisen.

23. [78]

    The second passage (at 279) relied upon by the appellant was the following explanation given by Handley JA:

24. [79]

    In concluding that the relevant contractual power was subject to a condition that it be exercised reasonably, Handley JA took into account a number of considerations. The first, reflecting the point made by Priestley JA set out above, was as follows: [32]

25. [80]

    Handley JA noted that the second matter depended upon the fact that the power is engaged by “the satisfaction of the principal”, which had been held in other cases to refer to “an opinion which is reasonable or to one which is merely honest” but stated that the implication of reasonableness was “readily made”. [33]

26. [81]

    The third matter was the existence of an opportunity for the contractor to show cause and to take the matter to arbitration. He described the provision for arbitration of disputes as “a further indication that the powers … are subject to some limitations other than honesty”. [34]

27. [82]

    A second case involving default was Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church, Archdiocese of Sydney. [35] Hughes Bros was decided a year after Renard Constructions and involved the same power to terminate upon default by the contractor, in cl 44 of the then standard construction contract. Default included the commission by the contractor of an act of bankruptcy.

28. [83]

    Priestley JA adhered to what he had written in Renard Constructions and implied an obligation on the part of the parties to act reasonably in enforcing provisions in the contract. However, his references to “the reasonableness obligation” omitted references in Renard Constructions to the meaning of that term as an aspect of the implied obligation to act in good faith. Neither Kirby P nor Meagher JA commented on this apparent expansion of the principles stated in Renard. However, both the President and Meagher JA indicated that they were following Renard Constructions only because they were bound by it. Kirby P did not think it distinguishable, but Meagher JA did.

29. [84]

    A third case involving default was Burger King Corporation v Hungry Jack’s Pty Ltd. [36] The case involved a “development agreement” pursuant to which the principal, Burger King, authorised Hungry Jack’s to establish franchise operations in Australia. Burger King enjoyed broad powers under cl 4.1 to terminate the agreement where a franchisee had defaulted or failed to comply with a direction given by Burger King. The Court accepted the respondent’s submission that “unless some restriction was placed upon the operation of cl 4.1, the rights under the development agreement would be illusory”. The Court concluded that the contractual powers under cl 4.1 were to be exercised “in good faith and reasonably”. [37] The joint reasons continued:

30. [85]

    In considering Renard Constructions, the Court addressed the “[m]eaning of good faith and reasonableness”:

31. [86]

    United’s claims arise in a different legal context. First, in the breach cases the contractor relied on the potentially arbitrary and capricious operation of a provision which allowed the principal to terminate the contract for any breach, either of a term of the contract or of a direction by the principal, no matter how insignificant. Thus, Renard Constructions involved default resulting from delay combined with a decision of the principal who did not know (because he was not informed) of the reason for the delay, namely unavailability of supplies. The principal was thereby misled by incomplete information which acted adversely (prejudicially) to the interests of the contractor. That finding involved a retrospectant consideration of past circumstances. Neither the language, nor the outcome, can readily be applied to a circumstance where the trigger for the lessor’s power (damage to the premises) is not in doubt and the lessor is required to make an evaluative, prospectant, judgment based on estimations of future costs. To say that a better estimate might have been made on other material is not to say that the lessor acted otherwise than in good faith nor, in the absence of evidence that other material would have led to a different conclusion and was readily available, could it be said that it acted unreasonably in the sense envisaged in Renard Constructions and Burger King.

32. [87]

    Secondly, there was no provision in the Lease for arbitration of disputes. An arbitration effectively requires a review of the factual exercise of the power by an independent third party. The possibility of such a review, the result of which will be binding on the parties, takes away an element of control otherwise vested in the principal by the contract.

33. [88]

    Thirdly, there was no default or breach. Through no fault of either party, the circumstances in which the contract was entered into had changed. It was not open to the tenant to require the landlord to rectify the situation by rebuilding; nor was it open to the tenant to insist on remaining in the premises at an abated rent for decades, thus diminishing the return to the landlord and the value of the property.

34. [89]

    The approach adopted in Burger King reflected that which had earlier been adopted in Alcatel Australia Ltd v Scarcella. [38] The appellant in that case was a lessor; the respondents were the lessees. Under the lease, the lessor was required to maintain the premises and keep them “in good and substantial repair”. The relevant issue was identified in the following passage: [39]

35. [90]

    After discussing the relevant cases, Sheller JA noted: [41]

36. [91]

    Sheller JA concluded: [42]

37. [92]

    The second lease case upon which United placed reliance was a decision of Bryson J in McIntosh v Dylcote. [43] The case concerned a hotel lease with a provision (cl 3.11) dealing with storm damage, which in fact occurred. The chapeau to the provision stated:

38. [93]

    Bryson J identified his approach to this provision in the following terms:

39. [94]

    Although a decision of a single judge and not binding on this Court, the clause in question was similar to cl 8.2.3 of the Lease. However, two points may be made in relation to this reasoning. First, although there were elements of similarity between the provision in the case of damage to premises in McIntosh and in the present case, there was also a major disparity: the present case involved no dispute resolution process, which was a significant factor in the reasoning set out above.

40. [95]

    Secondly, the implication of reasonableness extending to a determination of whether relevant facts objectively exist, is a significant extrapolation on the principle in Renard. That extrapolation, it may be accepted, finds support in the reasoning of Priestley JA in Hughes Bros, discussed above. The expansion of the stringent obligation to act reasonably in enforcing the wide-ranging default provisions permitting termination, to a clause dealing with the effects of damage to the premises for which neither party was responsible, required consideration of the operation of the storm damage clause: that is not found in McIntosh.

41. [96]

    Before turning to the application of the relevant principles to the Lease, it is necessary to refer to one other case upon which the appellant placed reliance, namely the decision of this Court in Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service. [44] United relied on the discussion of “good faith” in the concurring reasons of Allsop P at [5]-[17]. In that passage, the President outlined the broad principles derived from earlier cases, key examples of which have been discussed above. However, it should be noted that the discussion took place in a context where the contract expressly stated that the standard of mutual behaviour was that of “utmost good faith”. The President stated:

42. [97]

    One other case should be referred to in this context. In Royal Botanic Gardens and Domain Trust v South Sydney City Council, [45] the High Court considered a dispute as to the basis upon which a landlord was entitled to determine the rent payable with respect to public land used by the Council as a recreation area in the City of Sydney. The lease provided that “in making any such determination the Trustees may have regard to additional costs and expenses which they may incur in regard to the surface of the Domain …”. The question was whether that was the only matter which the Trustees were entitled to consider or whether their discretion was at large. The High Court upheld the conclusion of this Court that the statement was exhaustive. In doing so, the joint reasons noted that there was no mechanism for dispute resolution in relation to periodic rent determinations and their conclusion was consistent with the non-commercial nature of the lease. [46]

43. [98]

    The trial judge (Hodgson J) had taken a different view, subject to an implied term that in making a rent determination “the lessor must act bona fide for the purposes of determining a rent which is no more than a fair and reasonable rent”. [47] The High Court held that such an implied term “would contradict the express terms [the lease]”. [48] However, the Court went on to make the following observations:

44. [99]

    Kirby J in separate dicta opposed such an implied term:

45. [100]

    Callinan J reached the same conclusion as to the operation of the clause. He concluded with the following observation:

46. [101]

    The observations of Kirby J reflected concerns he had raised whilst on this Court in Hughes Bros. Callinan J, although describing the submissions of the appellant as “far-reaching”, provided no comfort for, or support of, such a conclusion based on the cases referred to. The language of the joint judgment was more neutral, but was certainly not supportive. As noted above, Gummow J, one of the joint authors, whilst on the Federal Court, had rejected the generic implication of a term of good faith. [49]

47. [102]

    Is the conduct of the landlord in giving notice under a clause of the Lease dealing with the consequences of damage to the leased premises required to justify that conduct according to a standard of objective reasonableness, as assessed by the court? The trial judge used the term “subjective reasonableness” in this context, [50] which has the appearance of an oxymoron. However, it is best understood as reflecting the fact that it involves no obligation to take the lessee’s interests into account, on the one hand, but on the other is to be judged against the circumstances, knowledge and interests of the lessor itself. It aptly describes a standard which precludes capricious or arbitrary decision-making and is, in substance, a requirement to act in accordance with the purpose for which the power was agreed upon in the contract.

48. [103]

    As explained above, the cases dealing with clauses permitting termination for even the most insignificant default or breach, which permit review by an independent arbitrator, have no necessary application to cl 8.2.3. Nor is it clear that the concept of unreasonableness engaged in those cases is anything less than a standard of gross or serious unreasonableness, described in public law as legal unreasonableness. Expansion of those principles should be approached with caution, given the doubts expressed by two members of this Court in Hughes Bros and the cautious comments of the High Court in Royal Botanic Gardens.

49. [104]

    There is a further consideration of principle which militates against the imposition of an objective standard of mere reasonableness. Meagher JA noted in Renard Constructions that counsel for the contractor had “conceded that the principal was not burdened by any element of altruism”. In Burger King the Court observed that the principal was “entitled to have regard only to its own legitimate interests in exercising its discretion”. That is, it was not required to take the contractor’s interests into account in reaching a decision. However, it is difficult to envisage a standard of objective reasonableness which, at least in the present circumstances, would not require the lessor to have regard to the lessee’s interests.

50. [105]

    It follows that the trial judge was correct to assess the validity of the notice given by Coastal on the basis that it was the product of an honest and genuine consideration in good faith of the circumstances justifying the notice. There was no requirement to assess Coastal’s conduct according to a standard of objective reasonableness.

51. [106]

    Nevertheless, for reasons which will be explained below, the case based on objective reasonableness must fail, in no little part because there was no significant independent evidence against which Mr Roberts’ opinions could be judged to be unreasonable.

Application of principles

1. [107]

   The issue for present purposes is not whether the parties were subject to an implied obligation to exercise powers under the Lease bona fide or in good faith; rather, the question is whether such an implied constraint extends to a requirement that the landlord act reasonably, on the basis of facts found by the Court in the case of a challenge, in giving a cl 8.2.3 notice.

2. [108]

   Indeed, there is an issue as to whether the question should be limited further. There are three acts encompassed within cl 8.2.3, namely (i) the landlord’s formation of the relevant opinion, (ii) the landlord giving notice to the tenant of that opinion, and (iii) either the landlord or the tenant terminating the lease. No doubt these actions are interrelated. There would be no purpose in the landlord forming the opinion unless it intended to notify the tenant of the opinion formed. In the circumstance that the landlord did not intend to repair the premises (and the tenant could not force it to do so) it might be assumed that in most cases the landlord would form the opinion and serve the notice because it wished to terminate the lease. However, that would not necessarily be so: the tenant, which could itself make a request to the landlord to repair within a reasonable time and then terminate if the landlord failed to comply with the request, could terminate the lease. It is not, however, clear that the tenant would wish to take that step in all circumstances. The request might force the landlord’s hand in circumstances where that was not in the tenant’s interest; it might also leave the tenant’s right in suspension until it became clear that the landlord was not complying with the request. Accordingly, the conferral on the tenant of a right to terminate pursuant to cl 8.2.3 may have utility. That in turn raises a question as to whether the third step (termination) was a step which could only be taken by either party acting in good faith. However, given the nature of the precondition, it is difficult to give utility to such an implication in relation to termination, which is not subject to any preconditions beyond the service of a valid notice.

3. [109]

   No doubt it is entirely possible to imply a condition of good faith with respect to some activities under the lease, but not others. This analysis demonstrates the danger of some global implication of a term requiring all activities to be the subject of an implied obligation to act in good faith.

4. [110]

   Turning then to the other aspects of cl 8.2.3, it may be accepted that the landlord was not entitled to serve a notice unless it had formed the requisite opinion. It is possible to add the epithets “honest” or “genuine” to the opinion, but neither serves any purpose. A dishonest opinion or a non-genuine opinion is not an opinion held by the landlord.

5. [111]

   In what other circumstances may the opinion be dismissed as not formed according to law? If the opinion relied on by the landlord is not expressed in terms of impracticability or undesirability, that would not be a relevant opinion. As noted above, practicability may be based upon an assessment of likely costs and benefits, but is not necessarily limited to such circumstances. There will be overlap between such an assessment and an assessment of desirability. Such a broad concept as desirability cannot be judged by any fixed set of criteria. Although the analysis was not undertaken by the parties in this case, perhaps the best that can be said is that the criteria must reflect the legitimate business interests of the landlord. The clause envisages, in effect, that the landlord might find it desirable to terminate the Lease and conduct a more profitable activity on the land. If that were so, it is not clear why such a purpose would fail to satisfy the clause, even if there were an obligation to act in good faith.

6. [112]

   In the present case (which may not be uncommon in this respect) impracticability and undesirability were both addressed by reference to the same set of financial considerations. The appellant sought to undermine the opinion formed by the landlord on three overlapping bases, namely that Mr Roberts, (i) had overestimated the costs of repair and underestimated the likely revenue once repairs were completed; (ii) had deliberately (or unreasonably) skewed the estimates so as to produce the result he wanted; and (iii) did not hold a genuine view that repairs would be either impracticable or undesirable. In the end, it was only the basis of the calculations which could be assessed against a reasonableness standard. If the Court is not to take over the decision-making process conferred by the parties on the landlord, the first step in the challenge can only succeed if the estimates relied on by Mr Roberts were beyond any range of figures which a reasonable businessperson in his shoes could adopt. In my view, that is an available approach and, if the excess is predominantly in one direction, it may provide a basis for upholding the second step in the challenge and possibly the third.

7. [113]

   The appellant demanded a more rigorous analysis, on the basis of which the Court, exercising its own judgment as to the reasonableness of the estimated costs and revenue, would find that the opinion formed was invalid because it departed from Mr Roberts’ assessment in that regard. Even if that approach were adopted, the appellant’s case ran into three difficulties.

8. [114]

   The first was that the appellant at trial called no expert evidence upon which the Court could form a basis as to the reasonableness of Mr Roberts’ estimates. Rather, the appellant relied on material available to Mr Roberts to invite the Court to conclude that his estimates based on that material were unreasonable.

9. [115]

   Secondly, to the extent that Mr Roberts believed in the reasonableness of the estimates he had made, he was entitled to rely upon his own not inconsiderable expertise and experience in building construction, including many years conducting an electrical engineering business.

10. [116]

    Thirdly, in so far as the appellant needed to challenge the genuineness of Mr Roberts’ beliefs, he was faced with credit findings by the trial judge which were entirely favourable to Mr Roberts. Although no reference was made to the need to apply the rigorous requirements of Fox v Percy [51] in order to interfere with those credit-based findings, the appellant effectively accepted that approach by relying upon the documentation available to Mr Roberts as demonstrating that his ultimate opinion was based on “incontrovertible facts or uncontested testimony” or was “glaringly improbable”, although the test was not fully articulated. However, the exercise in fact undertaken was circular: it effectively required rejection of Mr Roberts’ evidence as to the basis of his reliance on specific material in order to permit an inference that the material was inconsistent with his conclusion. The documentary evidence was not truly independent evidence of the kind which might assist to overturn a credibility finding.

11. [117]

    If the correct test is that there must be a high level of unreasonableness before this Court will interfere with an opinion as to the practicability or desirability of repairs in circumstances where the opinion was formed by an expert in the construction industry, the appellant must fail, because it made no submission that it had surmounted such a high hurdle. To address, on a contingent basis, the lesser hurdle requiring an objective assessment by the trial judge, it is necessary to turn to the evidence, including Mr Roberts’ opinions and the material on which they were based.

12. [118]

    United’s case, as largely revealed by the cross-examination of Mr Roberts, was that Mr Roberts, as the governing mind of Coastal, had formed a view prior to issuing the cl 8.2.3 notice that he wanted to terminate the lease. The financial analysis, provided in his affidavit of 19 January 2022, was designed to achieve that purpose. That was done by overstating the likely expense of rebuilding and underestimating the likely revenue which would follow upon the rebuilding. The case was put to Mr Roberts towards the conclusion of his cross-examination in the following terms: [52]

13. [119]

    What was not entirely clear from the cross-examination was when the determination to exclude United was said to have arisen. The implicit suggestion was that it predated the determination to issue the cl 8.2.3 notice, a decision which, although stated in Mr Roberts’ affidavit as having been made over the course of 17-18 January 2022, he explained in the course of cross-examination had had its origins in a discussion with his accountant on 15 December 2021. [53]

14. [120]

    The motive for the affidavit justifying the decision under cl 8.2.3 was suggested to be an attempt to “[shore] up your position so that you could deploy your affidavit in [the proceedings]” in which Coastal claimed unpaid rent and challenged the validity of a notice given by United on 25 March 2021 exercising an option to renew the lease.

15. [121]

    The background to that dispute is material and has been set out above. [54] In summary, Coastal entered into a contract to buy the property on 31 May 2018; the fire occurred on 30 July 2018; the sale was delayed but completion occurred on 20 June 2019, with a purchase price adjusted from $6.5m to $5m. At that stage United accepted that Coastal intended to rebuild, as they immediately employed Perception Planning to produce plans and a development application. The value of the works entered on the development application coincided with the reduction in the purchase price, namely $1.5m. The development application was approved in January 2020, shortly before the lockdowns induced by the COVID-19 pandemic.

16. [122]

    In his principal affidavit, Mr Roberts gave evidence of a conversation “[a]round the second half of 2019, with an officer of NAB at which time he was advised that the bank would have issues with extending a loan facility by about $1.5 million in circumstances where United were only paying 44% of the lease amount”. [55]

17. [123]

    During 2020, United reduced its opening hours, which had originally been 24 hours per day, which was a requirement of the lease. [56]

18. [124]

    On 25 March 2021 United served a notice exercising its option to renew. Mr Roberts was cross-examined in relation to his desire to terminate the Lease on the basis that in March 2021 he had opposed United’s attempt to renew for five further years. The following cross-examination addressed this issue: [57]

19. [125]

    The trial judge directly addressed this issue in dealing with Mr Roberts’ credibility, stating:

20. [126]

    Much of the cross-examination was devoted to this issue. However, a reading of the transcript does not provide a basis for concluding that the trial judge misunderstood the case being put or otherwise misused her position of advantage in assessing the evidence. The chronology supports the conclusion that the commencement of proceedings involved a bona fide step by Coastal to resolve the outstanding issue of what rent United should pay and whether it was justified in not operating full hours. It is true that Coastal took steps to terminate the Lease based on the cl 8.2.3 notice only after the proceedings with respect to the rental payable had been settled, although there remained an outstanding issue as to whether United, having been paying at a lower rate at the time it purported to exercise the option to renew, was in breach at that time and therefore not entitled to take up the option to renew. That raised a question as to whether the breach should be excused pursuant to the provisions of the Conveyancing Act, as the trial judge ultimately ruled, in United’s favour, in the present proceeding. However, the present question was whether the service of the cl 8.2.3 notice in January 2022 involved a change of tactic, in an attempt to terminate the Lease by other means, or, as Coastal asserted, the resolution of the rent issue provided clarity as to the financial circumstances which then allowed Mr Roberts to decide whether to proceed with the rebuilding or not.

21. [127]

    The trial judge addressed the direct attack on the genuineness of the analysis undertaken by Mr Roberts in his affidavit as to the financial considerations involved in the rebuilding exercise. The trial judge stated:

22. [128]

    That proposition should be accepted, as must the trial judge’s further step in assessing the challenges raised by United to determine whether it should be inferred that Mr Roberts’ calculations were “not genuine”. It is true that the trial judge did not consider whether the calculations were objectively unreasonable, although for reasons set out above, that exercise was not required. However, it will be convenient to apply that standard against the possibility that a different view may be taken of the correct approach.

Costs of rebuilding

1. [129]

   In undertaking this exercise, two matters will need to be borne in mind. The first, as noted by the respondent, is that in various respects it is apparent that Mr Roberts erred on the conservative side in calculating costs. To the extent that appears to have been so, it must cast doubt on the proposition that his primary purpose was to inflate the costs to justify a conclusion that rebuilding was impracticable or undesirable. Secondly, it must be borne in mind that the appellant tendered no evidence to demonstrate that any aspect of Mr Roberts’ calculations were so unreasonable as not to be genuine, or even unreasonable in the sense that they fell outside a legitimate range.

2. [130]

   In its written submissions in this Court United challenged five aspects of Mr Roberts’ analysis. It is convenient to commence with one matter as to which the appellant had documentary support for its criticisms.

3. [131]

   Mr Roberts’ evidence in his affidavit was as follows:

4. [132]

   Drayton’s quotation included a significant number of exclusions, some of which were addressed by Mr Roberts’ evidence. It also included ten provisional sums, including one for “electrical, comms, security and CCTV” at $440,000. The total of the provisional sums was a little over $1 million, or one-third of the contract price. The copy of Drayton’s quote annexed to the affidavit did not contain a qualification to that item which was contained in a copy of the document obtained on subpoena from Drayton in the course of the proceedings. The qualification read as follows:

5. [133]

   Mr Roberts was cross-examined as to how what United described as the “doctored” quote came to be attached to his affidavit. United sought to draw the inference that the exclusion was deliberate, so as to conceal the fact that a major element of the quote might have involved an unreasonably inflated price. United also questioned why a covering email from Drayton was not attached to the affidavit. The covering email included the following:

6. [134]

   A week later, on 14 July 2020, Drayton forwarded a further email with suggestions for reducing the price for the electrical elements to $350,000 by making seven changes to the deposed design. That too was not included by Mr Roberts as an attachment to his affidavit.

7. [135]

   The trial judge dealt with Drayton’s quotation in the following passages. The first addressed an allegation by United that “Mr Roberts engaged in fraud in intentionally deleting the words in parentheses in order to support his disingenuous assessment of the likely build cost”. [58] The trial judge rejected that submission, stating that she was not comfortably satisfied that “Mr Roberts altered the invoice attached to his affidavit or caused that alternation”. [59] That conclusion was based upon an assessment of his evidence in cross-examination and on the evidence that it was unlikely that he personally altered the invoice as he was not “good with computers”. [60] Nor did the trial judge think that the qualification was of such consequence as to provide a motive for deception.

8. [136]

   Taken in isolation, and acknowledging the force of the constraints identified in Fox v Percy on the rejection of an assessment of credit of a witness by a trial judge, there would be little basis for interference with that conclusion. However, it should not be taken in isolation: of greater substance was the failure to include the alternative (and lower) pricing from the electrician, subsequently supplied by Drayton. If there were a basis for concluding that the failure to disclose that document demonstrated a nefarious purpose, the exclusion of the qualification to the quote would need to be reconsidered. That is because the qualification might have suggested the existence of a later and lower quotation.

9. [137]

   While it is true that the trial judge did not deal with them together, she did deal with both points, stating:

10. [138]

    United challenged that justification on the basis that Mr Roberts had separately applied a 25% uplift to Drayton’s price to allow for those factors. That criticism had substance. For that reason, and given the failure to put together the two pieces of evidence, it is necessary to look more closely at the cross-examination of Mr Roberts on this issue. The cross-examination commenced by dealing with the email from Mr Skelly of Drayton to which the quotation was annexed: [61]

11. [139]

    Mr Roberts agreed that the use of western red cedar was a very expensive timber and that there were a few luxury items “that they could definitely cull back on, yeah”. [62] With respect to “complex and expensive services” Mr Roberts noted that Drayton had “allowed for the switchboards, to take the larger power upgrades and everything like that. But he excluded all of the external services outside the building”. [63]

12. [140]

    The cross-examination ended with the following exchange: [64]

13. [141]

    After the luncheon adjournment, cross-examining counsel showed Mr Roberts the original quote obtained from Drayton and asked him to note the variation from the copy attached to his affidavit, continuing: [65]

14. [142]

    The cross-examiner then turned to the omitted subsequent email from the electrician forwarded by Drayton to Mr Roberts. He was asked if, “about a week after Drayton gave you the quote, they sent another email” and he responded, “they sent a number of emails, yes”. [66] Asked why he did not attach the further email from the electrician, the following exchange took place: [67]

15. [143]

    In re-examination Mr Roberts gave the following evidence in relation to the provisional sums and his view of the quotation supplied by Drayton: [68]

16. [144]

    There can be little doubt that United was entitled to be critical of the way in which Mr Roberts’ affidavit had been prepared and the lack of attention to what should properly have been included in it. However, Mr Roberts accepted that it was the “back of an envelope calculation” that he had made in January 2022 and had not attempted a precise costing. On that view, the affidavit, far from being disingenuous, may have provided an accurate account of those matters to which Mr Roberts had regard. On that view, deficiencies in the affidavit did not demonstrate a lack of good faith.

17. [145]

    United submitted that there was inconsistency in his evidence in that his explanation for not varying the cost of timber, because the cost accurately reflected the current cost of less expensive timber, was inconsistent with the addition of a 25% markup on the total cost in the quote to account for cost increases over time. That may be so, but his explanation in reply did not accept that the premises should have been redesigned to avoid the “luxury” items.

18. [146]

    Further, to the extent that United relied upon the fact that there were a number of high priced “luxury” items, they were a function of the design and, so far as the evidence revealed, the design was prepared by Perception Planning at about the time that Coastal acquired the property and very shortly after the fire. There was no evidence that the design process had incorporated inflated elements for the ulterior purpose of making the rebuilding of the premises uneconomic, nor that in June 2019 when the design was prepared Coastal had any intention other than to rebuild.

19. [147]

    Bearing these factors in mind, United did not demonstrate by objective evidence that the trial judge’s findings with respect to the credibility of Mr Roberts were glaringly improbable or otherwise unsupportable. Having regard to Mr Roberts firm rejection in cross-examination of knowledge as to how the qualification to one item in Drayton’s quotation came to be removed, the judge’s acceptance of that evidence should not be reversed. Mr Roberts accepted that he had seen the lesser figure proposed by the electrician, but did not accept it. There was no necessary inference based on an assumed obligation to disclose adverse material that the figures he did accept were inflated or, indeed, unreasonable. By not calling expert evidence, United forewent a demonstration that the figures ultimately adopted by Mr Roberts were unreasonable, let alone manifestly unreasonable.

Cost of concreting

1. [148]

   Mr Roberts gave evidence that he took Drayton’s $3.28 million quotation and added an uplift of 25%, being the midrange of 20% to 30%. He gave evidence that his accountant had told him on 15 December 2021: [69]

2. [149]

   Mr Roberts said that he agreed with his accountant’s range and took the middle figure, which, applied to Drayton’s quotation, brought the cost to $4.1 million. There were additional items not included in Drayton’s figure. The largest of the additional items was “the cost of the concreting in and around The Rock, including the carpark area”. He said that approximately 5,500 square metres (m2) of carpark and fuel canopy concrete area were required at a market rate of $150/m2, giving a total figure of $825,000. However, using a concrete plant on site would reduce the cost to $85/m2 giving a total figure of $467,500, which he rounded down to $450,000. On its face, as counsel for Coastal submitted, that approach was hardly consistent with an attempt to inflate the costs of the rebuilding exercise.

3. [150]

   United’s challenge to the inclusion of any figure for concreting was based on three propositions. The first was that no approval for re-concreting was contained in the development application which was approved by Council. The second was that the need for re-concreting put forward by Mr Roberts in his oral evidence was not referred to in his affidavit. Thirdly, his purported reliance on drainage purposes was not something that Mr Roberts expressed with confidence in his oral evidence.

4. [151]

   As to the question of development consent, Mr Roberts accepted that the concreting had not been included in the development application, because, he stated, it could be undertaken pursuant to a complying development certificate. That answer was apparently based on there being no expansion of the present footprint, which was subject to existing use rights, as Mr Roberts noted. While agreeing that he did not know if further drainage work would be required, he said that he assumed it would because the development consent required compliance with “current building construction codes”. [70] The cross-examination concluded: [71]

5. [152]

   In the course of cross-examination, Mr Roberts broke the figures down to approximately 3,500 m2 for the building envelope and 2,000 m2 for the rest of the concrete “leading up to the actual hardstands”. [72] The cross-examiner asked if he understood the figures correctly to which Mr Roberts stated: [73]

6. [153]

   Mr Roberts was taken back to the figures in his re-examination and asked to explain how the drainage interacted with the laying of concrete to which he responded: [74]

7. [154]

   The trial judge accepted Mr Roberts’ evidence with respect to the concreting costs. [75] No basis for rejecting that finding has been demonstrated. As the trial judge also noted, there was no evidence to suggest that Mr Roberts’ estimates were objectively unreasonable.

8. [155]

   While addressing the question of the concreting costs, United submitted that the builder’s margin included in Drayton’s quotation should have been removed because Mr Roberts intended to use his own company, Coastal Earthmoving, “to control the builder’s margin”. [76]

9. [156]

   Two further propositions were included in that submission. First, “Mr Roberts made no attempt to identify or quantify the margin (if any) that Coastal Earthmoving were charging to Coastal”. That was true, but the cross-examination was limited to one question relied upon by the appellant in its written submissions, namely that a reason for putting the development application in the name of Coastal Earthmoving was to control the builder’s margin.

10. [157]

    Secondly, it was submitted that, “[t]his was despite the fact that, elsewhere in his evidence, in the context of concreting, Mr Roberts said that by using Coastal Earthmoving there would be a saving on ‘travel and markup’ in the order of 43%”.

11. [158]

    It is not clear whether that submission was pressed, but it was based on two false premises. The first false premise was that this was a saving which applied across the board, when the figure of 43% was derived from the explanation noted above, that the concreting cost could be reduced by having a batching plant on site. Secondly, as has already been noted, far from ignoring the benefit, Mr Roberts accepted it in pursuing the cost of concreting at the amount of $450,000 not $825,000. The submission ended by the proposition that these matters were not addressed in Mr Roberts’ affidavit (which in the latter case was false) or in her Honour’s reasons (which, with respect to the second matter was false and, as to the first matter, was not necessary as it was not the subject of any evidence or submissions beyond the one question in the opening of the cross-examination).

12. [159]

    The challenge in respect of this item failed.

13. [160]

    The challenge to the use of Drayton’s quotation plus a 25% uplift was based upon the proposition that the result “would have major implications for United’s long-term lease” and that the failure to obtain a second from Drayton “demonstrated a lack of good faith and reasonableness”. [77]

14. [161]

    The trial judge rejected the proposition that Mr Roberts was not genuine in his consideration of the cost of repairs in failing to obtain an updated quote. [78] The judge noted that Mr Roberts, being “the director of various companies that are involved in the construction industry … would have some knowledge of general prices and increases in prices”. That was a short reference to more detailed evidence which had been considered earlier that Mr Roberts had spent the better part of a decade undertaking electrical engineering on major infrastructure projects, before moving to Coastal Earthmoving which had been set up in about 2011 or 2012 to undertake “general earthworks projects, subdivisions, and property development” including building homes. Mr Roberts had stated: [79]

15. [162]

    In the absence of any evidence that contradicted or cast doubt on Mr Roberts’ experience or ability to provide estimates of cost increases over the period of the pandemic and beyond, the trial judge was entitled, if not in practical terms compelled, to accept his evidence given her assessment of his general credibility. His experience in the industry was not challenged in cross-examination.

16. [163]

    Mr Roberts included in his calculation current prices for power installation, new water requirements and new fire requirements, totalling $875,000 (including GST of $79,545). United submitted that the items included “hardware” to be acquired from a third party, but Mr Roberts did not obtain quotations. Further, to the extent that the items involved installation costs, there could have been savings by having Coastal Earthmoving do the works. Thirdly, it was “faulty logic” to have included GST when Coastal would receive input tax credits for GST paid.

17. [164]

    In relation to the fire equipment, Mr Roberts explained in his affidavit the costs he had relied on for two new tanks, a new pump, a concrete base slab and ring beam, and additional pipe work. The costs came to $330,000 to which he added GST and then rounded down to $350,000. The cross-examiner took Mr Roberts to Drayton’s quotation and obtained a concession that it was exclusive of GST. Mr Roberts then said, “so, I probably do need to add GST to that”. [80] The cross-examiner then suggested that “for consistency, you should have stripped out the GST for all of the figures in your affidavit [dealing with power, water and fire requirements]”. Mr Roberts responded:

18. [165]

    Mr Roberts confirmed that each was GST inclusive to which the cross-examiner stated, “for consistency with the Drayton’s quote, you should have stripped out GST, shouldn’t you?” to which Mr Roberts replied:

19. [166]

    It was true that Mr Roberts never said “Coastal will have to pay GST on those items”, but the point was self-evident and not in dispute. Rather, the cross-examiner elicited a concession that the input credit would involve a reimbursement. [82] The cross-examiner then asked:

20. [167]

    Counsel then suggested that the amount of GST was $120,000, and, asked:

21. [168]

    The question was objected to and withdrawn, counsel for Coastal submitting that Mr Roberts’ evidence related to “the costs to rebuild” and said nothing about “input tax credits”. The line of questioning was not then pursued.

22. [169]

    The concession as to “faulty logic” was of little significance, absent identification of the premises on which it was based. There was no suggestion put to Mr Roberts that he had been dishonest, or had included GST to inflate the costs (which, arguably, it did not do in any event). A suggestion of carelessness was not pursued. As to the amount of the GST, no explanation was given as to how the figure of $120,000 was obtained: the GST on the three items of power, new water and fire may have been an amount of $79,545 if the only elements were equipment, which they clearly were not. The amount of the excess would then be reduced by the rounding down involved in relation to fire equipment by $13,000.

23. [170]

    With respect to the inclusion of GST, the trial judge noted that, although input credits might have been obtained, it was not misleading to include GST as a cost, as Coastal would have needed to pay it. United challenged this finding, claiming among other things that the trial judge had “overlooked the fact that at no stage did Mr Roberts give evidence that he included GST because Coastal would still need to pay for it”. The submission was trivial and should not be accepted: it was implicit in Mr Roberts’ repeated statements that GST should have been added that that was because Coastal would have to pay it.

24. [171]

    As to the other expenses, United noted that the trial judge had not addressed them. The reason the trial judge did not address them is apparent from the cross-examination of Mr Roberts which raised no challenge to the amounts claimed, in circumstances where United did not seek to demonstrate that the amounts were not reasonable and appropriate.

25. [172]

    The relevance of the costs of rebuilding was that it formed the denominator in a calculation of the likely rate of return on investment if the building went ahead. The sum of the expenses calculated by Mr Roberts was $5,425,000. When he undertook the calculation of the rate of return, he did not use that figure, but rather $5 million. In other words, there was a rounding down of $425,000, for which United’s submissions made no allowance. As Coastal submitted, there was no basis for the submission that Mr Roberts had shown any intention to dishonestly inflate the costs of the rebuilding, nor to do otherwise than undertake a genuine exercise in calculating those costs. Whether the overall costing was within a reasonable range could not be determined on the evidence, except to say that there was no evidence other than that of Mr Roberts; United did not demonstrate that his final figure was outside a reasonable range.

Rental income

1. [173]

   The other integer in the calculation of the rate of return was the likely additional rental income that would be obtained once the rebuilding was completed. Prior to the fire, there had been four tenants, namely United, Aussie Bush Camp, Tania Mangion and Subway. Mr Roberts made three estimates with respect to the calculation of income.

2. [174]

   First, the effect of the rebuilding would have been to increase United’s payments from 79% to 100% of rent provided for in the Lease, being an amount of $108,400 on the basis of the rental for the 2021/2022 financial year. To that he added an amount of $164,000 for rent from other new tenants. Mr Roberts gave an explanation for that figure: [83]

3. [175]

   United submitted that the rental income was understated.

4. [176]

   Prior to the fire, there were three other lessees (or licensees) of parts of the roadhouse, in addition to United. These were all food outlets, the two apart from Subway being Aussie Bush Camp and an individual, Ms Tania Mangion. Aussie Bush Camp had a kitchen supplying food for some 12,000 children per week attending the camps, which were in a bush area behind the roadhouse. Mr Roberts agreed that the commencing rent in 2009 paid by Aussie Bush Camp was $100,000. However, he noted that the lease expired in 2014 and Aussie Bush Camp had built their own dining area. [84] Mr Roberts was then challenged for not including that information in his affidavit. However, given that it was the cross-examiner who sought to rely upon the existence of a prior arrangement, that complaint, repeated in written submissions, was without substance.

5. [177]

   The lease to Ms Mangion commenced in August 2014 and ran for a period of five years at a rental of $108,000 per annum. Ms Mangion operated a takeaway shop. Mr Roberts agreed in cross-examination that that figure was much higher than the figure he had used for calculating his possible rental income, but explained that the rent was high because Ms Mangion also serviced the Aussie Bush Camp. The cross-examination continued: [85]

6. [178]

   A more effective line of cross-examination relied upon a letter of intent provided by Subway expressing an interest in returning to The Rock Roadhouse if it were rebuilt. On 30 July 2020, Subway provided a letter of intention to lease with a minimum base rent of $60,000 per annum plus GST with a percentage rent of 10% of turnover up to $1 million turnover per annum, and 8% of turnover for more than $1 million per annum. (It did not include payment of any share of outgoings and included an initial six-month rent-free period.)

7. [179]

   Mr Roberts remembered that the letter contained a base figure of $60,000 but not the percentage of turnover figures. It was put to him that if the turnover was just short of $1 million Coastal would receive an extra $100,000 in rent. He said:

8. [180]

   As he had expressed some doubt about Subway reaching that target, it was put to him that if it reached half the target he would get an extra $50,000 and he responded:

9. [181]

   The cross-examiner continued:

10. [182]

    Annexed to the letter of intent was a letter from Raine and Horne, Commercial, dated 22 July 2020 which contained a proposal with Subway’s amendments and signatures. It did not provide a full copy of the lease conditions, so that the calculation of turnover rent was somewhat obscure. However, it appears that turnover rent was not payable until a turnover threshold had been crossed which was calculated as the gross sales multiplied by the relevant percentage, less the base rent. Accordingly, no turnover rent would be payable until gross sales exceeded $600,000 per annum. There was no evidence before the Court to indicate whether such a figure had ever been reached at The Rock Roadhouse, or would be reached at a rebuilt roadhouse, except Mr Roberts’ doubts that $500,000 would be reached. In any event, the assumption that the gross turnover rent was payable from the first dollar of turnover did not accord with the terms of the proposed lease. 2 Blue 532

11. [183]

    Mr Roberts gave evidence that the period of rebuilding would have been 18 months. Combined with a rent-free period on the Subway lease of 6 months Coastal had no basis to calculate (or receive) rental income (other than from United) for 2 years. Although that fact was not relied upon by Mr Roberts, it prevents any finding that his approach was objectively unreasonable.

12. [184]

    With respect to United’s lease, the lines of cross-examination were two-fold. First, it was suggested that the Lease provided for a rent increase of 3% per annum, or market rent, whichever was higher. Mr Roberts agreed that he had calculated the rent by reference to the 3% per annum increase and had not obtained a market appraisal. It was suggested to him that it was “entirely possible that market rent for United, trading from brand-spanking-new premises, would be higher than 3% above the previous year’s rent”, with which he agreed. He rejected the proposition that had he been genuine in his consideration of the practicability of rebuilding, he would have obtained a “market appraisal”.

13. [185]

    The second line of cross-examination was that he had relied on the current year rental and had not taken account of the increases for the future. He rejected the proposition that without considering future years, he was not “approaching this consideration in a genuine way”. [88]

14. [186]

    The trial judge accepted Mr Roberts’ explanations of the estimates of likely rent after the rebuild, including his explanation of why previous tenants had been prepared to pay higher rents because the premises were adjacent to their business operations. [89] With respect to the failure to consider future increases in United’s rent, based on market rent reviews, the trial judge did not “consider it was inappropriate for Mr Roberts to evaluate the situation as at January 2022, based on United’s then rent, which was a known figure that would be relevant to funding the rebuild”. [90]

15. [187]

    The trial judge concluded:

16. [188]

    The trial judge’s assessment of Mr Robert’s evidence as to anticipated rental income should be accepted. Without the opportunity to service the Aussie Bush Camp customers, there were no locked-in tenants other than United. The evidence indicated that United included in its operations a convenience store. The likely rental from new tenants was speculative. There was no reason to doubt the genuineness of Mr Roberts’ calculations in that respect.

17. [189]

    To the extent that United suggested that its own rent should have been calculated at a market rate, rather than the prescribed 3%, it was the better placed party to provide evidence of an alternative calculation: it did not do so. As to the suggestion that future rental should have been taken into account, Coastal submitted that future income flows would need to be discounted in the usual way. Alternatively, they would need to be assessed against future levels of outgoings and costs incurred by the landlord. The criticism that Mr Roberts failed to undertake such an exercise was without substance.

18. [190]

    There being no basis to doubt the genuineness of Mr Robert’s calculations, there is also no basis for doubting the reasonableness of the exercise he undertook with respect to future rental income. The only conclusion available to the Court would be that his calculations were not shown to be unreasonable.

Conclusions

1. [191]

   United has failed in its challenge to the judgment and orders of the trial judge. Accordingly, the Court should make the following orders:

   1. (1)

      Dismiss the appeal from the judgment and orders in the Equity Division.

   2. (2)

      Order that the appellant pay the respondent’s costs in this Court.